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Previous: HEALTHPLAN SERVICES CORP, 8-K/A, 1996-09-13 |
Next: TAX EXEMPT SECURITIES TRUST MARYLAND TRUST 98, 497, 1996-09-13 |
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
--------------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) July 1, 1996
------------
HEALTHPLAN SERVICES CORPORATION
(Exact Name of Registrant as Specified in Charter)
DELAWARE 1-13772 13-3787901
-------- ------- ----------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
3501 FRONTAGE ROAD, TAMPA, FLORIDA 33607
---------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (813) 289-1000
--------------
Not Applicable
--------------
(Former Name or Former Address, if Changed Since Last Report)
Exhibit Index on Page 44
<PAGE> 2
EXHIBIT INDEX
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
(a) Effective as of July 1, 1996 the Registrant acquired all of the issued
and outstanding shares of capital stock of Consolidated Group, Inc.,
Consolidated Group Claims, Inc., Consolidated Health Coalition, Inc.,
and Group Benefit Administrators Insurance Agency, Inc. (collectively,
the "Consolidated Group"), for a purchase price of approximately $61.5
million, subject to a post-closing adjustment based on the balance
sheet of the Consolidated Group as of June 30, 1996. The acquisition
was consummated pursuant to the terms of a certain Acquisition
Agreement dated May 17, 1996 (the "Agreement") between the Registrant,
the Consolidated Group, the shareholders of the Consolidated Group and
Holyoke L. Whitney as representative of the shareholders of the
Consolidated Group. The purchase price, which was paid in cash at the
closing of the acquisition, was determined through arms' length
negotiation between the parties. As of the date of the closing of
this acquisition, there was no material relationship between any of
the shareholders of the Consolidated Group and the Registrant or any
of the Registrant's affiliates, directors, officers or any associate
thereof.
Approximately $30 million of the funds used to pay the purchase
price of this acquisition were provided from the Company's working
capital, with the balance of the purchase price being provided to the
Registrant under its line of credit with a group of banks for which
First Union National Bank of North Carolina acts as agent, pursuant to
a renegotiation of such line of credit under the terms of that certain
Credit Agreement dated May 17, 1996, as amended by the First Amendment
thereto dated July 1, 1996, by and among the Registrant, HealthPlan
Services, Inc., Third Party Management Claims Inc., Healthcare
Informatics Corporation, the lenders who are or may become a party
thereto, and First Union National Bank of North Carolina, as agent for
the lenders. Under this line of credit, the Registrant is permitted
to borrow up to $85 million. Interest on funds drawn on this line is
calculated on a rolling for quarter pro forma basis. As of July 15,
1996, the amount drawn on this line is $60 million.
(b) The principal business of the Consolidated Group is the provision of
administrative services for health benefits to small groups, and the
bulk of its assets are comprised of contracts for the provision of
such administrative services. The only tangible assets of the
Consolidated Group as of the date of the acquisition consisted of
office equipment and certain real estate, which the Registrant intends
to continue using as office and storage facilities.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Businesses Acquired.
(b) Pro Forma Financial Information.
(c) Exhibits.
See Exhibit Index on page 44.
2
<PAGE> 3
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
<TABLE>
<S> <C> <C>
(a) Financial statements of businesses acquired (Consolidated Group, Inc. and Affiliates).
Report of Independent Auditors 4
Combined Balance Sheets December 31, 1995 and 1994 5
Combined Statements of Income and Retained Earnings for the years ended
December 31, 1995 and 1994 6
Statement of Changes in Stockholders' Equity for the years ended
December 31, 1995 and 1994 7
Combined Statements of Cash Flows for the years ended December 31, 1995 and 1994 8
Notes to Financial Statements 9
Report of Independent Auditors 17
Combined Balance Sheets December 31, 1994 and 1993 18
Combined Statements of Income and Retained Earnings for the years ended
December 31, 1994 and 1993 19
Statement of Changes in Stockholders' Equity for the years ended
December 31, 1994 and 1993 20
Combined Statements of Cash Flows for the years ended December 31, 1994 and 1993 21
Notes to Financial Statements 22
Financial statements of businesses acquired (Consolidated Health Coalition, Inc.).
Report of Independent Auditors 28
Balance Sheets December 31, 1995 and 1994 29
Statements of Income and Retained Earnings for the years ended
December 31, 1995 and 1994 30
Combined Statements of Cash Flows for the years ended December 31, 1995 and 1994 31
Notes to Financial Statements 32
Interim unaudited combined financial statements of businesses acquired (Consolidated Group)
Combined Balance Sheets June 30, 1996 and 1995 (Unaudited) 35
Combined Statements of Income for the six months ended June 30, 1996 and 1995 (Unaudited) 36
(b) Pro forma financial information.
Introduction to Unaudited Pro Forma Consolidated Financial Statements 37
Pro Forma Consolidated Balance Sheet June 30, 1996 (Unaudited) 38
Notes to Pro Forma Consolidated Balance Sheet 39
Pro Forma Consolidated Statement of Income for the six months
ended June 30, 1996 (Unaudited) 40
Pro Forma Consolidated Statement of Income for the year ended December 31, 1995 (Unaudited) 41
Notes to Pro Forma Consolidated Statements of Income 42
</TABLE>
3
<PAGE> 4
Bonanno, Savino & Davies, P.C.
Certified Public Accountants
105 Chestnut Street - Suite 32
Needham, Massachusetts 02192
(617) 449-3919
FAX (617) 449-7290
REPORT OF INDEPENDENT AUDITORS
The Stockholders and Board of Directors
Consolidated Group, Inc. and Affiliates
We have audited the accompanying combined balance sheets of Consolidated
Group, Inc. and Affiliates (S Corporations) as of December 31, 1995, and
1994, and the related combined statements of income, retained earnings, and
cash flows for the years then ended. These combined financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these combined financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Consolidated
Group, Inc. and Affiliates as at December 31, 1995, and 1994, and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Bonanno, Savino & Davies, P.C.
Needham, Massachusetts
March 15, 1996
4
<PAGE> 5
CONSOLIDATED GROUP, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
December 31, 1995, and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,682,511 $ 1,159,394
Accrued interest receivable 39,076 29,786
Administrative income receivable 1,801,603 1,235,177
Accounts receivable, associated company 1,362,797 2,302,495
Notes receivable, associated limited
partnerships, current maturities 110,123 48,775
Notes receivable, officers and
stockholders, current maturities 202,100 13,000
Prepaid expenses and deposits 1,858,321 1,902,527
------------ ------------
Total current assets 7,056,531 6,691,154
------------ ------------
Fixed assets, at cost, pledged:
Furniture, fixtures and equipment 11,709,453 9,813,189
Leasehold improvements 1,648,279 1,402,299
------------ ------------
13,357,732 11,215,488
Less: Accumulated depreciation,
and amortization 9,446,737 8,149,574
------------ ------------
Net fixed assets 3,910,995 3,065,914
------------ ------------
Other assets:
Notes receivable, associated limited
partnerships, less current maturities 4,191,016 4,063,639
Notes receivable, officers and stock-
holders, less current maturities 1,085,561 412,343
Intangible assets, net of amortization 681,162 499,560
------------ ------------
Total other assets 5,957,739 4,975,542
------------ ------------
TOTAL ASSETS $ 16,925,265 $ 14,732,610
============ ============
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
LIABILITIES
Current liabilities:
Notes payable, current maturities $ 1,390,333 $ 333,333
Accounts payable, trade 2,100,529 2,400,269
Accounts payable, associated company 845,678
Service fees payable 2,379,779 2,316,381
Payroll taxes withhold and accrued 201,084 147,881
State income taxes payable 5,903 54,428
Other accrued expenses 602,998 860,096
------------ ------------
Total current liabilities 7,526,304 6,112,388
Long-term liabilities:
Notes payable, less current maturities 2,236,055 611,111
------------ ------------
Total liabilities 9,762,359 6,723,499
------------ ------------
STOCKHOLDERS' EQUITY
Capital stock, common 3,000 3,000
Paid in capital 55,500 55,500
Retained earnings 7,104,406 7,950,611
------------ ------------
Total stockholders' equity 7,162,906 8,009,111
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,925,265 $ 14,732,610
============ ============
</TABLE>
See Notes to Financial statements
5
<PAGE> 6
CONSOLIDATED GROUP, INC. AND AFFILIATES
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
Years Ended December 31, 1995, and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Income:
Administrative fees, commissions
and reimbursements $73,902,375 $76,911,257
----------- -----------
Operating expenses:
Service fees 26,680,363 27,625,188
Salaries, wages and incentives 19,188,725 19,849,041
Other selling, general and
administrative expenses 24,810,961 28,721,099
----------- -----------
Total operating expenses 70,680,049 76,195,328
----------- -----------
Income from continuing operations 3,222,326 715,929
----------- -----------
Other income (expenses):
Investment income 454,142 444,329
Interest expense (134,214) (34,348)
Other, net (216,334) (211,244)
----------- -----------
103,594 198,737
----------- -----------
Income from continuing operations
and before taxes on income 3,325,920 914,666
Multi-state taxes (149,844) (62,745)
----------- -----------
Income from continuing operations, after taxes 3,176,076
DISCONTINUED OPERATIONS
(Loss) on discontinued business segment (less
applicable state tax benefit of $119,788) (3,170,359)
-----------
NET INCOME FOR THE YEAR 5,717 851,921
Retained earnings, beginning 7,950,611 7,220,516
Distributions to stockholders (851,922) (121,826)
----------- -----------
RETAINED EARNINGS, ENDING $ 7,104,406 $ 7,950,611
=========== ===========
</TABLE>
See Notes to Financial Statements
6
<PAGE> 7
CONSOLIDATED GROUP, INC. AND AFFILIATES
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1995, and 1994
<TABLE>
<CAPTION>
Group Benefits
Administrators Consolidated
Consolidated Insurance Group
Group, Inc. Agency, Inc. Claims, Inc. Total
------------- -------------- ------------- -----
<S> <C> <C> <C> <C>
Common stock:
Par value $ .01 $ .01 $ .01
Authorized, issued and
outstanding shares 100,000 100,000 100,000
December 31, 1994 $ 1,000 $ 1,000 1,000 3,000
----------- ------------- ----------- ----------
December 31, 1995 $ 1,000 $ 1,000 $ 1,000 3,000
=========== ============= ============ ==========
Additional paid in
capital:
December 31, 1994 $ 55,500 $ 55,500
----------- ----------
December 31, 1995 $ 55.500 $ 55,500
=========== ==========
Retained earnings:
December 31, 1994 $ 7,913,742 $ 12,162 $ 24,707 $7,950,611
Net income (loss) (8,617) 5,725 8,609 5,717
Distributions to
stockholders (823,033) (5,847) (23,042) (851,922)
----------- -------------- ----------- ----------
December 31, 1995 $ 7,082,092 $ 12,040 $ 10,274 $7,104,406
=========== ============== ============ ==========
</TABLE>
See Notes to Financial Statements
7
<PAGE> 8
CONSOLIDATED GROUP, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995, and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,717 $ 851,921
Adjustments for non-cash transactions
Depreciation and amortization of capital assets 1,610,180 1,431,304
Changes in operational working capital,
excluding cash and debt:
Reduction (increase) in:
Administrative income receivable (566,426) 953,366
Accounts receivable, associated company 939,698 (2,302,495)
Accrued interest receivable (9,290) 6,361
Prepayals and other receivables 44,206 (955,228)
Increase (reduction) - Accounts & other payables 356,916 1,493,403
----------- ------------
Net cash provided by
operating activities 2,381,001 1,478,632
----------- ------------
Cash flows from investing activities:
Acquisition of fixed and intangible assets (2,636,863) (2,006,074)
Loans to officers, stockholders and
associated limited partnership (1,455,000)
Payments received on notes receivable officers,
stockholders & associated limited partnerships 403,957 52,281
----------- ------------
Net cash used in investing activities (3,687,906) (1,953,793)
----------- ------------
Cash flows from financing activities:
Increase in notes payable 3,285,000 1,000,000
Debt reduction (603,056) (437,777)
Distributions to stockholders (851,922) (121,826)
----------- ------------
Net cash provided by financing activities 1,830,022 440,397
----------- ------------
Net increase (decrease) in cash and equivalents 523,117 (34,764)
Cash and equivalents, beginning 1,159,394 1,194,158
----------- ------------
Cash and equivalents, ending $ 1,682,511 $ 1,159,394
=========== ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 134,214 $ 34,348
----------- ------------
Taxes $ 58,456 $ 32,242
----------- ------------
</TABLE>
8
<PAGE> 9
CONSOLIDATED GROUP, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, and 1994
NOTE 1 : SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies and practices of Consolidated
Group, Inc. and its affiliates (the Companies) are set forth to
facilitate an understanding of the combined financial
statements. The financial statements and notes are
representations of the Companies' management, who are
responsible for their integrity and objectivity. Preparation of
the financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and
disclosures. Actual results could differ from those estimates.
BASIS OF ACCOUNTING
The financial statements were prepared on the accrual basis of
accounting in accordance with generally accepted accounting
principles.
PRINCIPLES OF COMBINATION
The financial statements include the combined accounts of
Consolidated Group, Inc. and its affiliates, Group Benefit
Administrators Insurance Agency, Inc., and Consolidated Group
Claims, Inc. All material intercompany activity was eliminated
in the combination. The entities were combined on the basis of
common ownership, control, and related business activities.
NATURE OF BUSINESS AND INCOME RECOGNITION
Consolidated Group, Inc., (the Company) is the trust
administrator of several multiple employer trusts which provide
group insurance coverage to participating employers. As
administrator, the Company selects insurance carriers and
coverage and is responsible for marketing and administrative
functions relating to the trusts. The affiliated companies, in
general, provide ancillary services related to the trust
administration.
Administrative income is recorded on the effective date of
insurance coverage or when services are performed. Direct
selling expenses are recorded in conjunction with the
recognition of administrative income.
Continued .......
9
<PAGE> 10
CONSOLIDATED GROUP, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, and 1994
NOTE 1 : SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Concluded)
DEPRECIATION
The Companies provide for depreciation of fixed assets under the
straight-line and accelerated methods for book and income tax
purposes over useful lives ranging from 5 to 40 years.
AMORTIZATION OF INTANGIBLES
Intangible assets are amortized over the estimated life of each
specific asset not in excess of 10 years.
CORPORATION - INCOME TAX STATUS
Effective January 1, 1987, the Companies elected to be taxed
under the provisions of Subchapter S of the Internal Revenue
Code. Under those provisions, the Companies do not pay federal
income taxes. Instead, the stockholders of the Companies are
taxed on their proportionate share of the Companies' taxable
income. Consequently, the financial statements include no
provision for federal income taxes. Provision for state income
taxes is made based upon an allocation of the Companies' income
to various states using a sales, compensation and asset derived
formula.
LEASES
The Companies account for their lease arrangements as either
capital or operating leases depending upon criteria set forth in
Financial Accounting Standards Board Statement No. 13 "Accounting
for Leases."
10
<PAGE> 11
CONSOLIDATED GROUP, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, and 1994
NOTE 2 : CASH FLOW INFORMATION
The Companies consider all short-term investments with an
original maturity of three months or less to be cash
equivalents.
NOTE 3 : LEASE COMMITMENTS
OPERATING LEASES
The Companies lease facilities and equipment under long-term,
non-cancelable leases with initial lease periods from 2 to 10
years. Several of the leases have options to renew.
The following is a schedule of future minimum rental payments
required under the above operating leases as of December 31,
1995:
<TABLE>
<CAPTION>
Office,
parking
and storage
facilities Equipment Total
---------- --------- -----
<S> <C> <C> <C>
1996 $2,214,895 111,000 $ 2,325,895
1997 1,965,316 111,000 2,076,316
1998 1,684,478 1,684,478
1999 1,657,778 1,657,778
Thereafter 5,267 5,267
---------- -------- -----------
$7,527,734 $222,000 $ 7,749,734
========== ======== ===========
</TABLE>
The above tabulation is based on scheduled leases during the
initial lease periods and does not include the renewal
options. The Companies are responsible for additional payments
on certain rental facilities leases for taxes, insurance and
maintenance.
11
<PAGE> 12
CONSOLIDATED GROUP, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, and 1994
NOTE 4 : CORPORATE INCOME AND EXCISE TAXES
The provision for taxes for the years ended December 31, 1995,
and 1994, consists of the following:
<TABLE>
<CAPTION>
Multi-
Federal State Total
------- ------- -----
Currently payable:
<S> <C> <C> <C>
1995 Note 1 $ 30,056 $30,056
-------- -------
1994 Note 1 $ 62,745 $62,745
-------- -------
</TABLE>
NOTE 5 : RELATED PARTY TRANSACTIONS
During the years ended December 31, 1995, and 1994, the
Companies engaged in various transactions with their
stockholders or with entities owned by their stockholders,
either individually or collectively. The following is a
summary,of related party income, expenses, receivables,
payables and guarantees.
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
---- ----
<S> <C> <C>
Notes receivable associated
partnerships (see below) $4,301,139 $4,112,414
Notes receivable officers and
stockholders (see below) 1,287,661 425,343
Accrued interest receivable 39,076 29,786
Accounts receivable, associated
company (Note 11) 1,362,797 2,302,495
Accounts payable, associated
company (Note 11) 845,678
Office facilities rental
expense (Note 3) 1,815,470 1,739,700
Management, consulting and
service fees expense 4,040,092 8,526,054
Guarantee of debt 1,150,000
Interest income (see below) 415,242 354,540
</TABLE>
Continued..
12
<PAGE> 13
CONSOLIDATED GROUP, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, and 1994
NOTE 5 : RELATED PARTY TRANSACTIONS (Concluded)
Notes receivable, associated limited partnerships as follows:
(a) Due from Consolidated Group Service Company Limited
Partnership, lessor of the building occupied by the Company,
with a balance due of $4,063,639 at December 31, 1995. The
note is due in monthly instalments of $33,277 which includes
interest at 8.57% due January 1, 2020. Interest paid or
accrued on the note to the Company amounted to $350,199 in
1995.
(b) Due from Consolidated Ventures Limited Partnership,
lessor of parking facilities occupied by the Company, with a
balance due of $237,500 at December 31, 1995. The note is
due in monthly instalments of $4,750 plus interest at 9% per
annum. Interest paid or accrued on this note to the Company
amounted to $20,210 in 1995.
Notes receivable, officers and stockholders as follows:
(a) Notes from two stockholders amounted to $136,972 at
December 31, 1995, due on the earlier of October 31, 1996,
or the termination and distribution of the underlying
investment interest. The notes are without recourse to the
stockholders and the Company maintains a security interest
in the underlying investment. Interest paid or accrued to
the Company on these and similar notes retired during the
year amounted to $29,525 in 1995.
(b) Notes from five stockholders amounting to $1,150,689
at December 31, 1995. One of the notes, with a balance of
$170,690, is payable, interest only, to December 17, 1996,
at 5.95% and monthly payments thereafter of $3,296, with
final payment December 17, 2001.
The remaining notes, with balances amounting to $979,999,
are payable in monthly instalments of $16,667, beginning
November 16, 1995, plus interest at 8.75%. Interest paid or
accrued to the Company on these notes amounted to $15,308 in
1995.
The notes under subsection (b) are secured by stockholders'
interests in the affiliated companies.
13
<PAGE> 14
CONSOLIDATED GROUP, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, and 1994
NOTE 6 : LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31,
---------------
1995 1994
---- ----
<S> <C> <C>
Consolidated Group, Inc.
The following schedule of notes are payable to the Fleet
Bank and are borrowed under a $5,000,000 line of credit
which is renewable annually. Interest is payable at the
corporate base rate (8.5% at December 31, 1995) and the notes
are secured by the equipment of the Company.
Notes:
Monthly instalments of $27,778 to
October 1, 1997, plus interest $ 583,333 $ 944,444
Monthly instalments of $13,889 to
April 30, 1998, plus interest 388,889
Monthly instalments of $27,778 to
October 1, 1998, plus interest 916,666
Monthly instalments of $41,667 to
December 29, 1998, plus interest 1,500,000
Monthly instalments of $4,750 to
February 28, 2000, plus interest 237,500
------------- -----------
Total debt 3,626,388 944,444
Current maturities of long-term debt 1,390,333 333,333
------------- -----------
Long-term debt less current maturities $ 2,236,055 $ 611,111
============= ===========
</TABLE>
NOTE 7 : EMPLOYEE BENEFIT PLANS
The Companies maintain a salary reduction plan under which
eligible employees may defer a portion of their annual
compensation pursuant to Section 401(k) of the Internal
Revenue Code. Company matching contributions for 1995 were
$248,599 and $233,121 for 1994. The plan covers all employees
who are 21 years of age or older and have completed one year
of service.
14
<PAGE> 15
CONSOLIDATED GROUP, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, and 1994
NOTE 8 : STOCK REDEMPTION AGREEMENT
The Companies have stock redemption agreements with their
stockholders for all shares outstanding. In essence, the
agreement mandates the purchase of all the stockholders'
shares upon death at a redemption price of $250 per share. As
a provision of the agreement, the Companies maintain term life
insurance policies on the stockholders' lives, with face
amounts equal to the redemption price.
NOTE 9 : LITIGATION
Participant claims against insurance companies routinely
include the Companies as co-defendants in their capacity as
trust administrators. However, liabilities from claim
adjudication usually remain with the insurer. As to
outstanding actions at December 31, 1995, it is legal
counsel's opinion that the Companies have meritorious
defenses. Therefore, the Companies have made no provision for
any potential liability.
NOTE 10 : CONCENTRATION OF CREDIT RISK
The Companies maintain bank accounts with their lending
institution and had on deposit balances in excess of Federal
Deposit Insurance limits at December 31, 1995. Further, the
Companies invest excess cash in regulated investment company
money market funds for which no deposit insurance is
available.
15
<PAGE> 16
CONSOLIDATED GROUP, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, and 1994
NOTE 11 : DISCONTINUED OPERATIONS
In December, 1995, the Company elected to discontinue its
administrative services to self-insured employers and
international development support services carried on with
Consolidated Health Coalition, Inc. (CHC), an entity
associated with, but not under common control of, this
affiliated group.
The following is a summary of operations for 1995:
<TABLE>
<S> <C>
Revenues $ 6,929,788
Operating and administrative expenses 10,219,935
-----------
(3,290,147)
Tax benefit 119,788
-----------
Net (loss) $(3,170,359)
===========
</TABLE>
The Company will incur some additional net phase-out costs
during 1996.
The Company will continue to provide claims processing,
billing, collections and data processing services to CHC on
continuing fully-insured contracts and provider services
business. At December 31, 1995, the Company had a receivable
of $1,362,797, and a payable of $845,678 with CHC (Note 5).
16
<PAGE> 17
Bonanno, Savino & Davies, P.C.
Certified Public Accountants
105 Chestnut Street - Suite 32
Needham, Massachusetts 02192
(617) 449-3919
FAX (617) 449-7290
REPORT OF INDEPENDENT AUDITORS
The Stockholders and Board of Directors
Consolidated Group, Inc. and Affiliates
We have audited the accompanying combined balance sheets of Consolidated
Group, Inc. and Affiliates (S Corporations) as of December 31, 1994, and 1993,
and the related combined statements of income, retained earnings, and cash
flows for the years then ended. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Consolidated
Group, Inc. and Affiliates as at December 31, 1994, and 1993, and the results
of its operations and its cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ Bonanno, Savino & Davies, P.C.
Needham, Massachusetts
March 21, 1995
17
<PAGE> 18
CONSOLIDATED GROUP, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
December 31, 1994, and 1993
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,159,394 $ 1,194,158
Accrued interest receivable 29,786 36,147
Administrative income receivable 1,235,177 2,188,543
Accounts receivable, associated entity 2,302,495
Note receivable, Consolidated Group
Service Company Limited Partnership, current
maturities 48,775 44,782
Notes and loans receivable, officers and
stockholders, current maturities 13,000 432,843
Prepaid expenses and deposits 1,902,527 947,299
------------ ------------
Total current assets 6,691,154 4,843,772
------------ ------------
Fixed assets, at cost, pledged:
Furniture, fixtures and equipment 9,813,189 8,285,414
Leasehold improvements 1,402,299 1,307,740
------------ ------------
11,215,488 9,593,154
Less: Accumulated depreciation,
and amortization 8,149,574 7,004,781
------------ ------------
Net fixed assets 3,065,914 2,588,373
------------ ------------
Other assets:
Note receivable, Consolidated Group
Service Company Limited Partnership, less
current maturities 4,063,639 4,112,413
Notes receivable, officers and stock-
holders, less current maturities 412,343
Intangible assets, net of amortization 499,560 402,331
------------ ------------
Total other assets 4,975,542 4,514,744
------------ ------------
TOTAL ASSETS $ 14,732,610 $ 11,946,889
============ ============
<CAPTION>
LIABILITIES 1994 1993
---- ----
<S> <C> <C>
Current liabilities:
Notes payable, current maturities $ 333,333 $ 382,221
Accounts payable, trade 2,400,269 878,337
Service fees payable 2,316,381 2,786,877
Payroll taxes withheld and accrued 147,881 104,903
State income taxes payable 54,428 7,078
Other accrued expenses 860,096 508,457
------------ ------------
Total current liabilities 6,112,388 4,667,873
Long-term liabilities:
Notes payable, less current maturities 611,111
------------ -----------
Total liabilities 6,723,499 4,667,873
STOCKHOLDERS' EQUITY
Capital stock, common
Paid in capital 3,000 3,000
Retained earnings 55,500 55,500
7,950,611 7,220,516
------------ ------------
Total stockholders' equity 8,009,111 7,279,016
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,732,610 $11,946,889
============ ===========
</TABLE>
See Notes to Financial Statements
18
<PAGE> 19
CONSOLIDATED GROUP, INC. AND AFFILIATES
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
Years Ended December 31, 1994, and 1993
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Income:
Administrative fees, commissions
and reimbursements $76,911,257 $ 67,599,202
----------- ------------
Operating expenses:
Service fees 27,625,188 26,212,172
Salaries, wages and incentives 19,849,041 15,964,664
Other selling, general and
administrative expenses 28,721,099 25,511,487
----------- ------------
Total operating expenses 76,195,328 67,688,323
----------- ------------
Income (loss) from operations 715,929 (89,121)
----------- ------------
Other income (expenses):
Investment income 444,329 444,318
Interest expense (34,348) (34,797)
Other, net (210,244) (177,945)
----------- ------------
198,737 231,576
----------- ------------
Income before taxes on income 914,666 142,455
Multi-state taxes (62,745) (20,629)
----------- ------------
NET INCOME FOR THE YEAR 851,921 121,826
Retained earnings, beginning 7,220,516 7,401,194
Distributions to stockholders (121,826) (302,504)
----------- ------------
RETAINED EARNINGS, ENDING $ 7.950,611 $ 7,220,516
=========== ============
</TABLE>
See Notes to Financial Statements
19
<PAGE> 20
CONSOLIDATED GROUP, INC. AND AFFILIATES
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1994, and 1993
<TABLE>
<CAPTION>
Group Benefit
Administrators Consolidated
Consolidated Insurance Group
Group, Inc. Agency, Inc. Claims, Inc. Total
------------ -------------- ------------ -----
<S> <C> <C> <C> <C>
Common stock:
Par value $ .01 $ .01 $ .01
Authorized, issued and
outstanding shares 100,000 100,000 100,000
December 31, 1993 $ 1,000 $ 1,000 $ 1,000 $ 3,000
---------- ----------- ----------- ----------
December 31, 1994 $ 1,000 $ 1,000 $ 1,000 $ 3,000
========== =========== =========== ==========
Additional paid in
capital:
December 31, 1993 $ 55,500 $ 55,500
---------- ----------
December 31, 1994 $ 55,500 $ 55,500
========== ==========
Retained earnings:
December 31, 1993 $7,116,029 $ 10,192 $ 94,295 $7,220,516
Net income 823,033 5,847 23,041 851,921
Distributions to
stockholders (25,320) (3,877) (92,629) (121,826)
---------- ----------- ----------- ----------
December 31, 1994 $7,913,742 $ 12,162 $ 24,707 $7,950,611
=========== =========== =========== ==========
</TABLE>
See Notes to Financial Statements
20
<PAGE> 21
CONSOLIDATED GROUP, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1994, and 1993
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 851,921 $ 121,826
Adjustments for non-cash transactions
Depreciation and amortization of capital assets 1,431,304 1,210,318
(Gain) loss on disposal of fixed assets (2,880)
Changes in operational working capital,
excluding cash and debt:
Reduction (increase) in:
Administrative income receivable 953,366 75,528
Accounts receivable, associated entity (2,302,495)
Accrued interest receivable 6,361 9,165
Prepayals and other receivables (955,228) 83,542
Increase (reduction) - Accounts & other payables 1,493,403 466,305
----------- -----------
Net cash provided by
operating activities 1,478,632 1,963,804
----------- -----------
Cash flows from investing activities:
Acquisition of fixed and intangible assets (2,006,074) (1,485,324)
Proceeds from sales of fixed assets 2,880
Decrease in notes receivable 52,281 89,134
----------- -----------
Net cash used in investing activities (1,953,793) (1,393,310)
----------- -----------
Cash flows from financing activities:
Increase in notes payable 1,000,000
Debt reduction (437,777) (393,334)
Distributions to stockholders (121,826) (302,504)
----------- -----------
Net cash provided by (used in)
financing activities 440,397 (695,838)
----------- -----------
Net increase (decrease) in cash and equivalents (34,764) (125,344)
Cash and equivalents, beginning 1,194,158 1,319,502
----------- -----------
Cash and equivalents, ending $ 1,159,394 $ 1,194,158
=========== ===========
</TABLE>
21
<PAGE> 22
CONSOLIDATED GROUP, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
December 31, 1994, and 1993
NOTE 1 : SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies and practices of
Consolidated Group, Inc. (the Companies) and its affiliates
are set forth to facilitate an understanding of the combined
financial statements.
BASIS OF ACCOUNTING
The financial statements were prepared on the accrual basis of
accounting in accordance with generally accepted accounting
principles.
PRINCIPLES OF COMBINATION
The financial statements include the combined accounts of
Consolidated Group, Inc. and its affiliates, Group Benefit
Administrators Insurance Agency, Inc., and Consolidated Group
Claims, Inc. All material intercompany activity was eliminated
in the combination. The entities were combined on the basis of
common ownership, control, and related business activities.
NATURE OF BUSINESS AND INCOME RECOGNITION
Consolidated Group, Inc., (the Company) is the trust
administrator of several multiple employer trusts which
provide group insurance coverage to participating employers.
As administrator, the Company selects insurance carriers and
coverage and is responsible for marketing and administrative
functions relating to the trusts. The affiliated companies, in
general, provide ancillary services related to the trust
administration.
Administrative income is recorded on the effective date of
insurance coverage or when services are performed. Direct
selling expenses are recorded in conjunction with the
recognition of administrative income.
Continued .....
22
<PAGE> 23
CONSOLIDATED GROUP, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
December 31, 1994, and 1993
NOTE 1 : SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Concluded)
DEPRECIATION
The Companies provide for depreciation of fixed assets under the
straight-line and accelerated methods for book and income tax
purposes over useful lives ranging from 5 to 40 years.
AMORTIZATION OF INTANGIBLES
Contract and leasehold rights are amortized over the remaining
lives of 3 to 5 years. Other intangible assets are amortized
over the estimated life of each specific asset not in excess of
10 years.
CORPORATION - INCOME TAX STATUS
Effective January 1, 1987, the Companies elected to be taxed
under the provisions of Subchapter S of the Internal Revenue
Code. Under those provisions, the Companies do not pay federal
income taxes. Instead, the stockholders of the Companies are
taxed on their proportionate share of the Companies' taxable
income. Consequently, the financial statements include no
provision for federal income taxes. Provision for state income
taxes is made based upon an allocation of the Companies' income
to various states using a sales, compensation and asset derived
formula.
LEASES
The Companies account for their lease arrangements as either
capital or operating leases depending upon criteria set forth in
Financial Accounting Standards Board Statement No. 13
"Accounting for Leases".
23
<PAGE> 24
CONSOLIDATED GROUP, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
December 31, 1994, and 1993
NOTE 2 : CASH FLOW INFORMATION
The Companies consider all short-term investments with an
original maturity of three months or less to be cash
equivalents.
Cash paid for interest and income taxes for 1994 and 1993 was
as follows:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Interest $34,348 $36,623
Income taxes $15,395 $21,312
</TABLE>
NOTE 3 : LEASE COMMITMENTS
OPERATING LEASES
The Companies lease facilities and equipment under long-term,
noncancelable leases with initial lease periods from 2 to 10
years. Several of the leases have options to renew.
The following is a schedule of future minimum rental payments
required under the above operating leases as of December 31,
1994:
<TABLE>
<CAPTION>
Office and
storage
facilities Equipment Total
---------- --------- -----
<S> <C> <C> <C>
1995 $2,157,558 $111,000 $ 2,268,558
1996 2,141,434 111,000 2,252,434
1997 1,894,615 111,000 2,005,615
1998 1,618,835 1,618,835
1999 1,597,195 1,597,195
None thereafter
---------- -------- -----------
$9,409,637 $333,000 $ 9,742,637
========== ======== ===========
</TABLE>
The above tabulation is based on scheduled leases during the
initial lease periods. The Companies are responsible for
additional payments on certain rental facilities leases for
taxes, insurance and maintenance.
24
<PAGE> 25
CONSOLIDATED GROUP, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
December 31, 1994, and 1993
NOTE 4 : CORPORATE INCOME AND EXCISE TAXES
The provision for taxes for the years ended December 31, 1994,
and 1993, consists of the following:
<TABLE>
<CAPTION>
Multi-
Federal State Total
------- ------- -----
<S> <C> <C> <C>
Currently payable:
1994 Note 1 $62,745 $62,745
------- -------
1993 Note 1 $20,629 $20,629
------- -------
</TABLE>
NOTE 5 : RELATED PARTY TRANSACTIONS
During the years ended December 31, 1994, and 1993, the
Companies engaged in various transactions with their
stockholders or with entities owned by their stockholders,
either individually or collectively. The following is a
summary of related party income, expenses, receivables and
guarantees.
<TABLE>
<CAPTION>
December 31,
------------
1994 1993
---- ----
<S> <C> <C>
Note receivable (see below) $4,112,414 $4,157,195
Term loans receivable 425,343 432,843
Accrued interest receivable 29,786 36,147
Furniture and equipment leasing
expenses (Note 3) 330,612
Office facilities rental
expense (Note 3) 1,739,700 1,697,586
Management, consulting and
service fees expense 8,526,054 9,974,903
Guarantee of debt 1,150,000 1,150,000
Interest income (see below) 354,540 358,156
</TABLE>
Included in administrative fees, commissions and
reimbursements income for the year ended December 31, 1994, is
$5,118,884 representing services provided to Consolidated
Health Coalition, Inc., an entity associated with, but not
under common control of, Consolidated Group, Inc. and
Affiliates. The revenues earned represent fees for claims
adjudication processing, billing and collection, and data
processing services. Accounts receivable - associated entity
at December 31, 1994 - includes $2,302,495 receivable from
this associated entity for services provided during the year.
Continued..
25
<PAGE> 26
CONSOLIDATED GROUP, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
December 31, 1994, and 1993
NOTE 5 : RELATED PARTY TRANSACTIONS (Concluded)
Included in notes and loans receivable, officers and
stockholders, are certain promissory notes, amounting to
$412,343, due on the earlier of October 31, 1996, or the
termination and distribution of the underlying investment
interests. These notes are without recourse to the
stockholders. As to $175,763 of these notes, Consolidated
Group, Inc. maintains a security interest in the underlying
investment. Accrued interest receivable at December 31, 1993,
includes $6,361 due from officers and stockholders.
The principal balance of the note receivable from Consolidated
Group Service Company Limited Partnership at December 31, 1994
and 1993, was $4,112,414 and $4,157,195, respectively. Accrued
interest receivable from the partnership at December 31, 1994
and 1993, amounts to $29,369 and $29,689 respectively. The
note receivable is due in monthly instalments of $33,277,
which includes interest at 8.57% due January 1, 2020.
Consolidated Group, Inc. has guaranteed the debt of one of its
stockholders in the amount of $1,150,000 at December 31, 1994
and 1993.
NOTE 6 : LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31,
------------
1994 1993
---- ----
<S> <C> <C>
Consolidated Group, Inc.
Note payable, Shawmut Bank, N.A. payable in monthly
instalments of $27,778 to October 1, 1997, with
interest at the corporate base rate (8.5% at December
31, 1994.) The note is secured by computer equipment. $944,444
Note payable, Shawmut Bank N.A. payable in monthly
instalments of $21,667 to December 27, 1994, with
interest at the corporate base rate. This note was
paid in full during 1994. $259,996
Note payable, Shawmut Bank, N.A. payable in monthly
instalments of $11,111 to November 7, 1994, with
interest at the corporate base rate. This note was
paid in full during 1994. 122,225
-------- --------
Total debt $944,444 382,221
Less due within one year 333,333 382,221
-------- --------
$611,111 $ 0
======== ========
</TABLE>
26
<PAGE> 27
CONSOLIDATED GROUP, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
December 31, 1994, and 1993
NOTE 7 : EMPLOYEE BENEFIT PLANS
The Companies maintain a salary reduction plan under which
eligible employees may defer a portion of their annual
compensation pursuant to Section 401(k) of the Internal
Revenue Code. Company matching contributions for 1994 were
$233,121 and $197,822 for 1993. The plan covers all employees
who are 21 years of age or older and have completed one year
of service.
NOTE 8 : STOCK REDEMPTION AGREEMENT
The Companies have stock redemption agreements with their
stockholders for all shares outstanding. In essence, the
agreement mandates the purchase of all the stockholders'
shares upon death at a redemption price of $250 per share. As
a Provision of the agreement, the Companies maintain term life
insurance policies on the stockholders' lives, with face
amounts equal to the redemption price.
NOTE 9 : LITIGATION
Participant claims against insurance companies routinely
include the Companies as co-defendants in their capacity as
trust administrators. However, liabilities from claim
adjudication usually remain with the insurer. As to
outstanding actions at December 31, 1994, it is legal
counsel's opinion that the Companies have meritorious
defenses. Therefore, the Companies have made no provision for
any potential liability.
NOTE 10 : CONCENTRATION OF CREDIT RISK
The Companies maintain bank accounts with their lending
institution and had on deposit balances in excess of Federal
Deposit Insurance limits at December 31, 1994. Further, the
Companies invest excess cash in regulated investment company
money market funds for which no deposit insurance is
available.
27
<PAGE> 28
[BSD LOGO] BONANNO, SAVINO & DAVIES, P.C.
Certified Public Accountants
105 Chestnut Street - Suite 32
Needham, Massachusetts 02192
(617) 449-3919
FAX (617) 449-7290
REPORT OF INDEPENDENT AUDITORS
The Stockholders and Board of Directors
CONSOLIDATED HEALTH COALITION, INC.
We have audited the accompanying balance sheets of Consolidated Health
Coalition, Inc., as at December 31, 1995 and 1994, and the related statements
of income, retained earnings and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly in
all material respects, the financial position of Consolidated Health Coalition,
Inc. as at December 31, 1995 and 1994, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Bonnano, Savino & Davies, P.C.
Needham, Massachusetts
March 15, 1996
28
<PAGE> 29
CONSOLIDATED HEALTH COALITION, INC.
BALANCE SHEETS
December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash in banks $1,041,954 $2,665,722
Administrative income receivable 950,660 2,203,582
Due from associated company 845,678
Deposits and other receivables 188,284 3,766
---------- ----------
Total current assets 3,026,576 4,873,070
---------- ----------
Fixed assets, at cost:
Furniture, fixtures and equipment 400,873 153,274
Less accumulated depreciation 134,283 29,948
---------- ----------
Net fixed assets 266,590 123,326
---------- ----------
Other assets:
Intangible asset, net of amortization 13,467 20,000
Investment, minority interest in
Recall Services, Inc. 1
---------- ----------
13,468 20,000
---------- ----------
TOTAL ASSETS $3,306,634 $5,016,396
========== ==========
LIABILITIES
Current liabilities:
Accounts payable, trade $ 979,964 $ 593,829
Due to insurance carrier 592,457 1,850,437
Due to associated companies 1,362,797 2,302,496
State excise payable 838 1,476
Payroll taxes withheld and accrued 117,466 158,430
Other accrued expenses and
deferred revenue 134,245
---------- ----------
Total current liabilities 3,187,767 4,906,668
---------- ----------
STOCKHOLDERS' EQUITY
Capital stock, common, no par value
Authorized 1,000,000 shares, issued
and outstanding 100,000 shares 100,000 100,000
Retained earnings 18,867 9,728
---------- ----------
Total stockholders' equity 118,867 109,728
---------- ----------
TOTAL LIABILITIES AND EQUITY $3,306,634 $5,016,396
========== ==========
</TABLE>
See Notes to Financial Statements
29
<PAGE> 30
CONSOLIDATED HEALTH COALITION, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Income:
Administrative fees $ 2,243,508 $8,614,017
------------ ----------
Operating expenses:
Service fees 88,731
Claims, billing, and data processing 874,329 6,465,984
Salaries, wages and incentives 609,053 1,203,343
Delivery 1,619 5,955
Depreciation and amortization 57,912 32,448
Employee training 12,702 8,177
Employee relations 19,760 6,337
Employee hiring 17,319 121,080
Equipment maintenance and repair 35,967 37,213
Group insurance and other fringe benefits 35,649 90,496
Medical information systems 9,544
Office supplies 23,803 56,384
Outside labor 22,090 79,736
Payroll and other non-income taxes 39,797 101,489
Postage 7,367 7,390
Printing 65,640 6,846
Professional fees 287,351 90,692
Rent 36,667 18,931
Telephone 12,263 26,502
Travel and entertainment 51,245 133,569
Utilities 608
Other general and administrative expenses 14,123 13,514
------------ ----------
Total operating expenses 2,234,200 8,595,425
------------ ----------
Income from continuing operations 9,308 18,592
------------ ----------
Other income (expense):
Interest and dividend income 1,193 30,655
Interest expense (38,043)
------------ ----------
1,193 (7,388)
------------ ----------
Income from continuing operations & before taxes 10,501 11,204
State excise (1,362) (1,476)
------------ ----------
Net income from continuing operations 9,139 9,728
------------ ----------
DISCONTINUED OPERATIONS
Income 12,729,350
Operating expenses (including
depreciation of $54,065) (12,729,350)
------------
Net discontinued operations
------------
NET INCOME FOR THE YEAR 9,139 9,728
------------ ----------
Retained earnings, beginning 9,728
------------
Retained earnings, ending $ 18,867 $ 9,728
============ ==========
</TABLE>
See Notes to Financial Statements
30
<PAGE> 31
CONSOLIDATED HEALTH COALITION, INC.
STATEMENTS OF CASH FLOWS
Year Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,139 $ 9,728
Adjustments for non-cash transactions:
Depreciation and amortization
of capital assets 111,977 32,448
Changes in operational working capital,
excluding cash and debt:
Reduction (increase) in:
Administrative income receivable 1,252,922 (2,203,582)
Due from associated company (845,678)
Deposits and other receivables (184,518) (3,766)
Increase (reduction) in:
Accounts payable 386,135 593,829
Due to associated companies (1,257,980) 2,302,496
Due to insurance carriers (939,699) 1,850,437
State excise payable (638) 1,476
Payroll taxes withheld and accrued (40,964) 158,430
Other accrued expenses and
deferred revenue 134,245
------------ ------------
Net cash provided by (used in)
operating activities (1,375,059) 2,741,496
------------ ------------
Cash flows from investing activities:
Acquisition of fixed and intangible assets (248,708) (175,774)
Investment in Recall Services, Inc. (1)
------------ ------------
Net cash used in investing activities (248,709) (175,774)
------------ ------------
Cash flows from financing activities:
Capital stock issued 100,000
------------ ------------
Net cash provided by financing activities 100,000
------------ ------------
Net increase (decrease) in cash (1,623,768) 2,665,722
Cash, beginning 2,655,722
------------ ------------
Cash, ending $ 1,041,954 $ 2,665,722
============ ============
</TABLE>
See Notes to Financial Statements
31
<PAGE> 32
CONSOLIDATED HEALTH COALITION, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 1 : SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidated Health Coalition, Inc., a Massachusetts corporation,
was organized on January 2, 1994. The following accounting
policies and practices of the Company are set forth to facilitate
an understanding of the financial statements. The financial
statements and notes are representations of the Company's
management, who is responsible for their integrity and
objectivity. Preparation of the financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect certain
reported amounts and disclosures. Actual results could differ
from those estimates.
NATURE OF BUSINESS AND INCOME RECOGNITION
The Company is a third party administrator of health insurance
contracts with various employers and insurance companies. The
Company provides administrative services only to self-insured
employers, administers insurance contracts under specific and
aggregate stop-loss provisions, and administers fully insured
contracts on behalf of insurance companies and HMOs.
Administrative income is recorded when services are performed.
CORPORATION - INCOME TAX STATUS
The Company has elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code. Under those
provisions, the Company does not pay federal income taxes on its
taxable income. Instead, the stockholders are liable for
individual federal income and state income taxes on their
respective share of the Company's taxable income. The
Commonwealth of Massachusetts imposes a 4.5% tax on taxable
income of large S corporations. Therefore provisions for state
income taxes are recorded in the year incurred.
DEPRECIATION
The Company provides for depreciation of fixed assets under the
straight-line and accelerated methods for book and income tax
purposes over years ranging from three to seven years.
32
<PAGE> 33
CONSOLIDATED HEALTH COALITION, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 2 : INVESTMENTS IN UNCONSOLIDATED SUBSIDIARY
The Company's investment in a minority-owned subsidiary, which has
been accounted for by the equity method is summarized as follows:
<TABLE>
<CAPTION>
Percent Investment
ownership December 31, 1995
--------- -----------------
<S> <C> <C>
Recall Services, Inc. 30% $ 1
</TABLE>
Summarized financial information from the unaudited financial
statements of Recall Services, Inc. are as follows:
<TABLE>
<S> <C>
Net assets $ 89,732
Net liabilities 18,906
Net sales 112,500
Net loss (17,800)
Consolidated Health's equity in loss (5,340)
</TABLE>
Net sales represent venture development fees paid by Consolidated
Health Coalition, Inc. to Recall Services, Inc.
NOTE 3 : RELATED PARTY TRANSACTIONS
The Company engaged in transactions with other entities,
Consolidated Group, Inc. and Consolidated Group Claims, Inc.,
certain of whose owners are also shareholders of the Company.
Billing and data processing services were provided by Consolidated
Group, Inc. Claims processing was performed by Consolidated Group
Claims, Inc. Included in operating expenses for the above services
is $7,655,513 for 1995 and $5,119,279 for 1994. Accounts payable
to above entities were $1,362,797 at December 31, 1995 and
$2,302,496 at December 31, 1994. Also, a receivable was due of
$845,678 at December 31, 1995 (see Note 7).
NOTE 4 : EMPLOYEE BENEFIT PLANS
The Company is a participant in a multi-employer salary reduction
plan under which eligible employees may defer a portion of their
annual compensation, pursuant to Section 401(k) of the Internal
Revenue Code. Employees transferred from Consolidated Group, Inc.,
and Consolidated Group Claims, Inc., were eligible to participate
for the year 1994. Eligibility otherwise includes all employees
who are 21 years of age or older and have completed one year of
service. Company matching contributions for 1995 were $19,273 and
$3,939 for 1994.
33
<PAGE> 34
CONSOLIDATED HEALTH COALITION, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 5 : CASH AND CASH EQUIVALENTS
For purposes of preparing the statement of cash flows, the
Company considers all short-term investments with an original
maturity of three months or less to be cash equivalents. Under
a temporary agreement with an insurance carrier which ended
September 30, 1994, the insurance premiums held on deposit were
required to be invested and such earnings were required to be
paid to the carrier. Although the funds were temporarily
uninvested, the Company agreed to pay the carrier interest in
the amount of $38,043 for the year ended December 31, 1994.
NOTE 6 : CONCENTRATION OF CREDIT RISK
The Company maintains cash balances at a bank. Cash accounts at
banks are insured by the FDIC for up to $100,000. Amounts in
excess of insured limits were approximately $1,169,437 at
December 31, 1995 and $2,536,384 at December 31, 1994.
NOTE 7 : DISCONTINUED OPERATIONS
During 1994, the Company acquired the rights from an insurance
carrier to provide administrative services on self-insured,
partially-insured and fully-insured contracts. Also the Company
began exploring the development of international insurance
products and services.
The Company utilized the services, on a contract fee basis, of
associated entities Consolidated Group, Inc. and Consolidated
Group Claims, Inc. to service and help develop the above
projects.
In December, 1995, the Company elected to discontinue the
administrative and support services to the self-insured
employers and abandon the international development project.
The following is a summary of operations for 1995:
<TABLE>
<S> <C>
Income $ 12,729,350
Operating expenses $ 12,729,350
</TABLE>
Consolidated Group, Inc., in anticipation of continuing
business, supported the project to cover cash deficiencies to
break even. The Company will continue its operations on
fully-insured contracts with insurance companies and HMOs and
provider services business. The associated entities above will
continue to provide claims processing, billing, collections and
data processing services on a contract fee basis. Fixed assets
of the discontinued operation will be utilized by the continuing
business.
34
<PAGE> 35
CONSOLIDATED GROUP
COMBINED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1996 1995
---- ----
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,853 $ 2,070
Accounts receivable 3,050 2,258
Prepaid expenses and other current assets 6,234 2,500
------- -------
Total current assets 11,137 6,828
Property and equipment, net 5,343 3,160
Note receivable - 4,711
Intangible assets, net 740 534
------- -------
Total assets $17,220 $15,233
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,914 $ 768
Premiums payable to carriers 107 -
Commissions payable 1,805 2,082
Accrued liabilities 1,069 1,511
Income taxes payable - -
Current portion of long-term debt 1,621 557
------- -------
Total current liabilities 6,516 4,918
Note payable 3,455 959
------- -------
Total liabilities 9,971 5,877
------- -------
Common stockholders' equity:
Common stock 159 59
Retained earnings 7,090 9,297
------- -------
Total stockholders' equity 7,249 9,356
------- -------
Total liabilities and stockholders' equity $17,220 $15,233
======= =======
</TABLE>
35
<PAGE> 36
CONSOLIDATED GROUP
COMBINED STATEMENT OF INCOME
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------------
1996 1995
------- -------
<S> <C> <C>
Operating revenues $35,750 $36,515
Interest income 246 280
------- -------
Total revenues 35,996 36,795
------- -------
Expenses:
Agents commissions 11,641 13,595
Personnel expenses 14,120 11,773
General and administrative 7,618 6,152
Depreciation and amortization 891 715
------- -------
Total expenses 34,270 32,235
------- -------
Income before interest expense and income taxes 1,726 4,560
Interest expense 142 55
------- -------
Income before income taxes 1,584 4,505
Provision for income taxes 712 1,819
------- -------
Net income $ 872 $ 2,686
======= =======
</TABLE>
36
<PAGE> 37
INTRODUCTION TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS
The following Unaudited Pro Forma Consolidated Financial Statements ("Pro Forma
Statements") include the accounts of HealthPlan Services Corporation ("the
Company") and its subsidiaries and the accounts of Consolidated Group, Inc.,
Consolidated Group Claims, Inc., Consolidated Health Coalition, Inc., and Group
Benefit Administrators Insurance Agency, Inc. (collectively, the "Consolidated
Group"). On July 1, 1996, the Company acquired all of the issued and
outstanding shares of capital stock of Consolidated Group in a transaction
accounted for as a purchase. The Pro Forma Statements also include the
accounts of Harrington Services Corporation ("Harrington") which was acquired
by the Company in a transaction accounted for as a purchase on July 1, 1996,
as reported on Current Report on Form 8-K as filed with the Securities and
Exchange Commission on July 16, 1996, and Current Report on Form 8-K/A as
filed concurrently with this Current Report on Form 8-K/A.
The Pro Forma Consolidated Balance Sheet as of June 30, 1996, assumes that the
Company acquired Consolidated Group and Harrington on June 30, 1996. The Pro
Forma Consolidated Statements of Income for the six months ended June 30, 1996,
and the year ended December 31, 1995 assume that the Company acquired
Consolidated Group and Harrington on January 1, 1995.
The Pro Forma Statements are presented for comparative purposes only. The Pro
Forma Statements are not intended to be indicative of what the actual results
of operations would have been had the transactions occurred as of the beginning
of the respective periods, nor do they purport to indicate the results which
may be obtained in the future.
The purchase price allocations for Consolidated Group and Harrington are based
on preliminary appraisals, estimates of useful lives, estimates of expenses,
and estimates of liabilities. The actual allocation of the purchase price will
be adjusted based on final appraisals, actual expenditures, and estimates made
after various studies have been completed. Accordingly, the actual recording
of the purchase could differ from the Pro Forma amounts reflected herein.
Management believes that there are synergistic opportunities which can be
derived from the consolidation of certain parts of the operations of the newly
acquired companies. Though these actions are in the process of being qualified
and quantified, it is not unreasonable to believe that the Company will make
future restructuring charges to accomplish such savings.
37
<PAGE> 38
HEALTHPLAN SERVICES CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Consolidated
HealthPlan Services Harrington Group, Inc. and
Corporation Services Corporation Affiliates Pro Forma Pro Forma
Actual Actual Actual Adjustments Combined
------ ------ ------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
$ 90,040 A
(52,690) B
Cash and cash equivalents $ 5,173 $ 3,232 $ 1,853 (32,500) C $15,108
Restricted cash 9,338 - - - 9,338
Short-term investments 30,040 - - (30,040) A -
Accounts receivable 8,189 4,636 3,050 - 15,875
Refundable income taxes - 198 - - 198
Prepaid commissions 319 - - - 319
Prepaid expenses and other current assets 2,735 1,095 6,234 (5,458) B 4,606
Deferred taxes 127 - - - 127
--------- -------- -------- ---------- -------
Total current assets 55,921 9,161 11,137 (30,648) 45,571
Property and equipment, net 9,833 7,399 5,343 - 22,575
Note receivable 6,900 - - - 6,900
61,850 B
61,300 C
Investment in unconsolidated subsidiaries 2,056 374 - (123,150) E 2,430
9,000 D
Intangible assets, net 49,173 20,827 740 104,926 E 184,666
--------- -------- -------- ---------- -------
Total assets $ 123,883 $ 37,761 $ 17,220 $ 83,278 $262,142
========= ======== ======== ========== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,178 $ 2,579 $ 1,914 $ - $ 5,671
Premiums payable to carriers 25,752 - 107 - 25,859
Commissions payable 3,105 - 1,805 - 4,910
Deferred revenue 716 - - - 716
Accrued liabilities 2,976 4,095 1,069 9,000 D 17,140
Income taxes payable 314 - - - 314
Current portion of long-term debt 70 4,137 1,621 - 5,828
--------- -------- -------- ---------- -------
Total current liabilities 34,111 10,811 6,516 9,000 60,438
Notes payable 1,186 8,039 3,455 60,000 A 72,680
Deferred taxes 631 3,834 - - 4,465
Other long-term liabilities 23 4,102 - - 4,125
--------- -------- -------- ---------- -------
Total liabilities 35,951 26,786 9,971 69,000 141,708
--------- -------- -------- ---------- -------
Common stockholders' equity:
2 B
13 C
Common stock 134 17 159 (176) E 149
3,700 B
28,787 C
Additional paid-in capital 71,870 6,314 - (6,314) E 104,357
Retained earnings 15,970 4,644 7,090 (11,734) E 15,970
--------- -------- -------- ---------- -------
87,974 10,975 7,249 14,278 120,476
Less: Valuation allowance on securities
available for sale (42) - - - (42)
--------- -------- -------- ---------- -------
Total stockholders' equity 87,932 10,975 7,249 14,278 120,434
--------- -------- -------- ---------- -------
Total liabilities and stockholders' equity $ 123,883 $ 37,761 $ 17,220 $ 83,278 $262,142
========= ======== ======== ========== =======
</TABLE>
See notes to unaudited pro forma consolidated balance sheet.
38
<PAGE> 39
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(A) To record the liquidation of the Company's $30.0 million short-term
investment portfolio and draw of $60.0 million on the Company's line
of credit.
(B) To record the cash paid for the stock of Consolidated Group of $61.9
million, Company stock sold to Consolidated Group shareholders of
$3.7 million, and settlement of related party receivables of
Consolidated Group of $5.5 million on July 1, 1996.
(C) To record the cash paid for the stock of Harrington of $32.5 million
and Company stock issued to Harrington shareholders valued at
approximately $28.8 million.
(D) To record estimated costs relating to the Company's acquisitions of
Consolidated Group and Harrington.
(E) To eliminate the Company's investment in Consolidated Group and
Harrington.
39
<PAGE> 40
HEALTHPLAN SERVICES CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
(in thousands except per share data)
<TABLE>
<CAPTION>
Consolidated
HealthPlan Services Harrington Group, Inc. and
Corporation Services Corporation Affiliates Pro Forma Pro Forma
Actual Actual Actual Adjustments Combined
------ ------ ------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $ 61,465 $ 40,364 $ 35,750 $ - $ 137,579
Interest income 1,405 90 246 (750) A 991
-------- -------- -------- -------- ---------
Total revenues 62,870 40,454 35,996 (750) 138,570
-------- -------- -------- -------- ---------
Expenses:
Agents commissions 19,952 - 11,641 - 31,593
Personnel expenses 16,850 25,053 14,120 - 56,023
General and administrative 11,676 9,703 7,618 - 28,997
Pre-operating and contract start-up costs 586 - - - 586
Depreciation and amortization 2,668 2,704 891 795 B 7,058
-------- -------- -------- -------- ---------
Total expenses 51,732 37,460 34,270 795 124,257
-------- -------- -------- -------- ---------
Income before interest expense and income
taxes 11,138 2,994 1,726 (1,545) 14,313
Interest expense 33 469 142 1,586 C 2,230
-------- -------- -------- -------- ---------
Income before income taxes 11,105 2,525 1,584 (3,131) 12,083
Provision for income taxes 4,331 1,010 712 (1,159) D 4,894
-------- -------- -------- -------- ---------
Net income $ 6,774 $ 1,515 $ 872 $ (1,972) $ 7,189
======== ======== ======== ======== =========
Dividends on Preferred Stock $ - $ 166 $ - $ (166) E $ -
======== ======== ======== ======== =========
Net income attributable to common stock $ 6,774 $ 1,349 $ 872 $ (1,806) $ 7,189
======== ======== ======== ======== =========
Pro forma net income per share 0.50 $ 0.48
======== =========
Weighted average shares used in
pro forma computation 13,460 14,908
======== =========
</TABLE>
See notes to unaudited pro forma consolidated statements of income.
40
<PAGE> 41
HEALTHPLAN SERVICES CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(in thousands except per share data)
<TABLE>
<CAPTION>
CONSOLIDATED
HEALTHPLAN SERVICES HARRINGTON GROUP, INC. AND
CORPORATION SERVICES CORPORATION AFFILIATES PRO FORMA PRO FORMA
ACTUAL ACTUAL ACTUAL ADJUSTMENTS COMBINED
------ ------ ------ ----------- --------
<S> <C> <C> <C> <C> <C>
Operating revenues 98,187 71,869 $ 73,914 $ - $243,970
Interest income 2,063 179 455 (1,500) A 1,197
-------- -------- -------- -------- --------
Total revenues 100,250 72,048 74,369 (1,500) 245,167
-------- -------- -------- -------- --------
Expenses:
Agents commissions 36,100 - 26,680 - 62,780
Personnel expenses 25,433 42,791 19,798 - 88,022
General and administrative 16,967 17,478 22,753 - 57,198
Pre-operating and contract start-up costs 1,664 - - - 1,664
Depreciation and amortization 4,386 4,801 1,668 1,764 B 12,619
-------- -------- -------- -------- --------
Total expenses 84,550 65,070 70,899 1,764 222,283
-------- -------- -------- -------- --------
Income before interest expense and income taxes 15,700 6,978 3,470 (3,264) 22,884
Interest expense 69 1,237 134 2,873 C 4,313
-------- -------- -------- -------- --------
Income before income taxes 15,631 5,741 3,336 (6,137) 18,571
Provision for income taxes 6,096 3,694 151 (2,420) D 7,521
-------- -------- -------- -------- --------
Income from continuing operations 9,535 2,047 3,185 (3,717) 11,050
Loss on discontinued business segment
net of tax benefit - - 3,170 - 3,170
-------- -------- -------- -------- --------
Net income $ 9,535 $ 2,047 $ 15 $ (3,717) $ 7,880
======== ======== ======== ======== ========
Dividends on Preferred Stock $ - $ 333 $ - $ (333) E $ -
Adjustment of put warrant - 1,500 - (1,500) F -
-------- -------- -------- -------- --------
Net income attributable to common
stock $ 9,535 $ 214 $ 15 $ (1,884) $ 7,880
======== ======== ======== ======== ========
Pro forma net income per share $ 0.71 $ 0.53
======== ========
Weighted average shares used in
pro forma computation 13,414 14,903
======== ========
</TABLE>
See notes to unaudited pro forma consolidated statements of income.
41
<PAGE> 42
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(A) To eliminate interest income on short-term investments liquidated as a
result of the acquisitions.
(B) To eliminate historical amortization and to record pro forma
amortization of estimated goodwill of $60 million and $75 million
for Consolidated Group and Harrington, respectively, over a 25
year period.
(C) To record estimated interest expense related to net borrowing on the
purchase of Consolidated Group and Harrington.
(D) To provide for consolidated income taxes at an estimated rate of 40.5%.
(E) To reverse dividends paid to Harrington preferred stockholders.
(F) To record the elimination of the accretion of the Harrington put
warrant as part of the transaction.
42
<PAGE> 43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be duly signed on its behalf by
the undersigned hereunto duly authorized, on July 15, 1996.
HEALTHPLAN SERVICES CORPORATION
(Registrant)
September 13, 1996 By: /s/ JAMES K. MURRAY, JR.
- ------------------ ---------------------------
Date James K. Murray, Jr.
President and Chief Executive Officer
43
<PAGE> 44
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------ ----------- --------
<S> <C> <C>
2 Acquisition Agreement dated May 17, 1996 between HealthPlan Services *
Corporation, Consolidated Group, Inc., Consolidated Group Claims, Inc.,
Consolidated Health Coalition, Inc., and Group Benefit Administrators
Insurance Agency, Inc., the named Shareholders, and Holyoke L. Whitney
as Shareholders' Representative.
23 Consent of Bonanno, Savino & Davies, P.C. 45
</TABLE>
* filed with original 8-K
44
<PAGE> 1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the registration
statements of HealthPlan Services Corporation on Form S-8s (File Nos. 33-92708,
33-97050, 33-97048, 33-00150, 333-07641, 333-07631) of our report dated March
15, 1996, on our audit of the financial statements of Consolidated Group Inc.,
and Affiliates as of December 31, 1995 and December 31, 1994, and for the years
ended December 31, 1995 and 1994; and of our report dated March 21, 1995, on our
audit of the financial statements of Consolidated Group Inc., and Affiliates as
of December 31, 1994 and December 31, 1993, and for the years ended December 31,
1994 and 1993, which report is included in this Form 8-K/A, Amendment No. 1, of
HealthPlan Services Corporation.
We hereby consent to the incorporation by reference in the registration
statements of HealthPlan Services Corporation on Form S-8s (File Nos. 33-92708,
33-97050, 33-97048, 33-00150, 333-07641, 333-07631) of our report dated March
15, 1996, on our audit of the financial statements of Consolidated Health
Coalition, Inc. as of December 31, 1995 and December 31, 1994, and for the years
ended December 31, 1995 and 1994, and of our report dated March 21, 1995, on our
audit of the financial statements of Consolidated Health Coalition, Inc. as of
December 31, 1994 and for the inception year ended December 31, 1994, which
report is included in this Form 8-K/A, Amendment No. 1, of HealthPlan Services
Corporation.
/s/ Bonanno, Savino & Davies, P.C.
Needham, Massachusetts
September 11, 1996
45
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